If you are considering a divorce, you may have heard some of the news about how the new tax planning affects asset division. One of the most important ways that the division of assets changed is in terms of alimony.
Specifically, the rules changed the way the IRS handles spousal maintenance for federal income taxes. Now, rather than subtracting alimony from the income beforehand as a deduction, the payer must account for income tax on their full taxable income and pay alimony from the remainder. In short, the maintenance payment no longer reduces tax. This has serious implications for high-asset divorcing couples in many cases.
The first thing you should consider is the tax bracket. What usually happens is that the spouse who pays alimony is in a much higher tax bracket than the one who receives. The higher tier means that a larger percentage of the income goes to the government.
There are systems in place that could balance this extra payment, but the end result is often that there is less money to go around in a divorce. That money would usually go to discretionary spending, which could include child support, spousal maintenance and many other categories.
Discretionary spending is often one of the most important asset division topics for divorcing couples. Beyond daily essentials, such as rent and basic living costs, these are the funds that maintain the quality of life you and your spouse were used to as a married couple. Reducing it in any way will probably affect both parties.
There is a lot to consider when involved in a high-asset divorce. However, even average earners should make sure they are not paying too much in taxes. The rules have the potential to change with every new year, so make sure you know how the current laws affect your decisions.